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FEDERAL RESERVE BANK
OF NEW YORK

H xitA iX tw
June 8, 1978

QUESTIONABLE SECURITIES TRANSACTIONS
To the Chief Executive Officer of Each State Member Bank
in the Second Federal Reserve District:

In recent months, it has come to the attention of the Federal banking agencies that a number of
banks and other financial institutions have been persuaded by certain securities salesmen to engage in
questionable securities transactions involving delayed delivery or forward placement (“forward”)
contracts and exchange traded interest rate futures (“futures”) contracts for Government National
Mortgage Association and U.S. Treasury securities. Several financial institutions have suffered
significant losses or found themselves in illiquid positions because of these activities.
Although futures and forward contracts may provide, in certain circumstances, a useful and
proper way to reduce a bank’s interest rate risk exposure, banks should be alert to the dangers that can
result from unauthorized or excessive trading or speculation in connection with such activities. State
member banks that are permitted to engage in these activities under State law are expected to conduct
such securities transactions in a safe and sound manner, with levels of activity reasonably related to the
bank’s reserves, capital structure, and business needs. State member banks are urged to develop
appropriate written policy objectives, and to maintain adequate records and controls, to accomplish this
goal.
Federal Reserve examiners will, at the time of their periodic examinations, review the policies,
procedures and practices of each State-chartered member bank to determine whether forward or
futures trading activities are being conducted in a safe and sound manner and at a level that bears a
reasonable relationship to the size and character of the bank’s business.
Any questions regarding this matter should be directed to our Bank Examinations Department
(Tel. No. 212-791-5897).




P a u l A. V o l c k e r ,
P residen t.